1. To reduce the Cost of Insurance
- Avoiding contributing to insurer costs such as marketing as well as insurers' profits
- Retain Investment Income on
-
Premiums that would otherwise be given to an insurer
- Claims reserves until settlement of losses is required
- Retained profits
- Retaining Underwriting Profit which also directly rewards loss prevention measures of captive
- Accessing the reinsurance market at lower cost and obtaining reinsurance commission
- Lowering costs by eliminating the acceptable risk through higher deductibles
- Reaching more a accurate degree of experience rating
- Obtaining further savings if the loss experience is better than average
|
2. To respond to times of reduced capacity in the Insurance Market
and ensure long term availability of cover.
- Premiums and capacity of the Insurance Market tends to be cyclical and volatile. Captives
and cells on the other hand are based on own loss experience and provide greater stability and continuity.
- Taking responsibility for own insurance requirements addresses the need for long-term
risk protection (not just annual renewals). Traditional markets have been known
to restrict the availability of capacity and cover when faced with new global risks
and the like.
- Accessing the reinsurance market directly also addresses concerns about insurer security
since: reinsurers tend to have higher
ratings then primary insurers
|
3. As part of a Business Strategy
- An organization may select what risks to retain and what to cede
- Development of reserves and over several years spread cost of fortuitous losses
and large losses
- To centralise risk management of the group
- Underwriting & Risk control: the parent's loss experience is reflected
in Underwriting results & there is easier risk information flow
- Implementation of global risk financing strategy: Conflicts of
view can arise between group & local management on amount of risk that should
be retained. Result could be that worldwide insurance costs are greater than they
should be & level of risk retained is not related to financial strength of organisation.
- Insuring the Uninsurable: Captives can also help in the
long term funding of many otherwise uninsurable risks.
- Simplified and tailor-made group insurance policies
- Supplement to conventional market cover where it does not provide full cover
- Inflexibility of conventional wordings in the insurance market could be eliminated – e.g. claims
made wordings
- Access to reinsurance markets
- Lower costs per unit of cover
- Control to buyer over amount of risk retained/reinsured by relating premiums more
directly to experience
- Underwrite unusual risks
- Offer cover with a substantial deductible on an excess of loss basis. - Better Service – captives can maintain control over the acquisition and use of risk-associated
services like loss adjusting and risk surveying
- Development as a profit centre – Customer business, investment income and reduced
expenses
- Taxation benefits - tax deductibility of premiums. Underwriting and Investment Profit could
be built up and reserves created (taxed only when declared as dividend) allowing
higher retention.
|